Scoop: What’s Behind Crypto Stablecoin Crash?

The crash of Terra’s UST has sparked serious debate over the future of the stablecoin space, while severely denting crypto market sentiment. UST de-pegged from the dollar earlier this week, and has since struggled to regain its 1:1 peg. Corrective measures from founder Do Kwon and the Luna Foundation Guard have done little to remedy its losses.

Tether (USDT), the world’s largest stablecoin, also appears to be under selling pressure, and is trading more than 4% below its $1 peg. This weakness has stirred up speculation that governments could use this as an example in issuing tighter regulations on the cryptocurrency industry.

Will the government ban stablecoins?

The U.S. Securities and Exchange Commission (SEC) could impose more restrictions on stablecoin issuance in the wake of this recent crash. A common theme among governments calling for more crypto regulations is investor protection. With Terra wiping out billions of investor money in days, they may have a strong point.

Prominent crypto lawyer John Deaton said SEC Chair Gary Gensler, and Senator Elizabeth Warren- both vocal crypto skeptics- could use Terra’s crash as “Exhibit A” for the need for regulations.

Gensler recently criticized crypto exchanges for acting against their customers’ best interests, in an interview with Bloomberg.  Gensler has also shot down multiple attempts at a spot crypto ETF citing concerns over investor holdings.

U.S. Treasury Secretary Janet Yellen also recently mentioned UST during a Senate Banking Committee hearing. Yellen called for better crypto regulation to prevent possible financial risks, such as Terra’s crash.

Stabelcoin Death A Boon For CBDCs?

Governments could use the current stablecoin rout to roll out their own Central Bank Digital Currencies (CBDCs). Several countries, including the United States, are already working on developing their own digital tokens.

In March, the Bank of England said stablecoins in their current form posed a major financial risk. It had called for better regulation of the space, and possibly, even a government-backed alternative.

China, which has outright banned cryptocurrencies, introduced a digital yuan this year. India, which is adopting an increasingly anti-crypto stance, also has plans to introduce its own CBDC.